If you want to renovate your home, here are some of the payment options that could be available to you:
Pay out of your own pocket
Using your own funds to finance a renovation can be more straightforward and less financially risky than borrowing money. For example, you could use any of the following for pay for a renovation:
- Personal savings
- Investments that you can cash in
- Money built up in your home loan's offset or redraw facility
Using your own money means you'll not have to worry about loans and interest rates. However, if you're using your own money, there are a couple of points worth keeping in mind:
- When considering accessing money via an offset or redraw facility, check the effect this could have on your loan interest payments in the long run.
- If you're planning to use savings to finance your renovations, it's sensible to ensure you retain an emergency fund to pay for unforeseen expenses.
Refinance your home loan
For a homeowner with enough equity built up in their property, refinancing their loan could be an option. This involves leveraging the equity in their home to top up the mortgage to help fund the renovation.
Usually, refinancing involves taking out a second smaller mortgage for the amount borrowed. But be aware that if you break your existing mortgage to refinance, you could incur a break fee.
Apply for a construction loan
If you're embarking on a large renovation project, such as an extension or a knock down and rebuild, you could consider a construction loan. A construction loan is, typically, based on the estimated final (post-renovation) value of your property, and allows you to drawn down funds to pay for work as it's completed.
Often, during the building phase, the interest on a construction loan is set at a floating rate. It then switches to a lower, fixed rate on the home's completion.
Take out a personal loan
A personal loan is another option for funding a renovation. Personal loans typically allow you to borrow up to around $50,000 (some lenders may have higher limits). And, generally, they come in two forms: secured or unsecured. Interest rates vary widely, depending on the loan product and lender, the loan term and your credit history.
Secured loans are, generally speaking, cheaper than unsecured loans, and can be secured against assets such as vehicles and property.
It's worth bearing in mind that an interest rate that could be considered low for a personal loan product would still be relatively high when compared against a similarly competitive home loan interest rate.
Other options
If your renovation is likely to involve smaller, more regular expenses, some other types of finance may be appropriate. For example, you could consider using a credit card or an overdraft facility.
Note that these options usually come with higher interest rates and fees than other types of finance, so may not be suitable for all renovations, particularly if you think you might not be able to repay the funds quickly.
